Ratio Analysis and Financial Metrics

Comprehensive practice flashcards defining financial ratios, coverage ratios, turnover calculations, and profitability formulas from the lecture notes.

Current Ratio

A liquidity ratio calculated as $\frac{\text{Current Asset}}{\text{Current liability}}$, with an industrial benchmark of $2:1$.

Liquid Ratio

A liquidity ratio calculated as $\frac{\text{Liquid Asset}}{\text{Current liability}}$, with an industrial benchmark of $1:1$.

Quick Asset

Liquid assets calculated as $\text{Current Assets} - (\text{stock} + \text{Prepaid expenses})$.

Gross Profit Ratio

A sales-based profitability ratio calculated as $\frac{\text{Gross profit}}{\text{Net sales}} \times 100$.

Cost of Goods Sold (COGS)

The direct costs of producing goods, calculated as $\text{Opening stock} + \text{Purchases} + \text{wages} + \text{All direct expenses} - \text{closing stock}$, or alternatively as $\text{Sales} - \text{Gross profit}$.

Operating Ratio

A sales-based profitability ratio calculated as $\frac{\text{COGS} + \text{operating expenses}}{\text{Net sales}} \times 100$.

Operating Profit Ratio

A sales-based profitability ratio calculated as $\frac{\text{Operating profit}}{\text{Net sales}} \times 100$, where Operating Profit equals $\text{Net sales} - \text{COGS} - \text{Operating expenses}$ or $\text{Gross profit} - \text{Operating expenses}$.

Net Profit Ratio

A profitability ratio calculated as $\frac{\text{Net Profit}}{\text{Net sales}} \times 100$, which can be computed as either $\frac{\text{PBT}}{\text{Net sales}} \times 100$ or $\frac{\text{PAT}}{\text{Net sales}} \times 100$.

Return on Investment (ROI)

An investment-based profitability ratio calculated as $\frac{\text{Profit before Interest and Tax}}{\text{Capital employed}} \times 100$, or $\frac{\text{Operating profit}}{\text{Capital employed}} \times 100$.

Capital Employed

Total capital utilized in the business, calculated as Gross Capital Employed ($\text{Fixed Assets} + \text{Current Assets}$) or Net Capital Employed ($\text{Fixed Assets} + \text{Current Assets} - \text{Current Liabilities}$).

Return on Shareholder's Fund

A profitability ratio calculated as $\frac{\text{Net Profit after Interest \& Tax}}{\text{Shareholder's fund}} \times 100$.

Return on Equity Shareholder's Fund

A profitability ratio calculated as $\frac{\text{Net profit after tax \& Preference dividend}}{\text{Equity shareholder's fund}} \times 100$.

Shareholder's Fund (Equity)

The total ownership interest consisting of $\text{Equity capital} + \text{Preference capital} + \text{All reserves and surplus}$.

Proprietary Ratio

A financial ratio calculated as $\frac{\text{Shareholder's fund}}{\text{Total Asset}}$.

Fixed Asset to Net Worth Ratio

A ratio comparing fixed assets to owners' funds, calculated as $\frac{\text{Fixed Asset}}{\text{Proprietor's fund}}$.

Fixed Asset Ratio

A ratio calculated as $\frac{\text{Fixed Asset (after depreciation)}}{\text{Long term funds}}$, where long term funds represent capital employed.

Capital Gearing Ratio

A leverage ratio calculated as $\frac{\text{Fixed Income bearing Fund}}{\text{Equity shareholder's fund}}$, which equals $\frac{\text{Preference share capital} + \text{Debentures} + \text{Long term loans}}{\text{Equity shareholder's fund}}$.

Stock Turnover Ratio

Also known as Inventory Turnover Ratio, calculated as $\frac{\text{COGS}}{\text{Average stock}}$.

Stock Velocity

The holding period for inventory, calculated as $\frac{\text{Average stock}}{\text{COGS}} \times \text{Number of days or months}$.

Debtors Turnover Ratio

A turnover ratio calculated as $\frac{\text{Net credit sales}}{\text{Average debtors including Bills Receivable}}$.

Average Collection Period

The time taken to collect from debtors, calculated as $\frac{\text{Average debtors including Bills Receivable}}{\text{Net credit sales}} \times (12 \text{ or } 365)$.

Creditors Turnover Ratio

A turnover ratio calculated as $\frac{\text{Net credit purchases}}{\text{Average creditors including Bills Payable}}$.

Average Payment Period

The time taken to settle accounts with suppliers, calculated as $\frac{\text{Average creditors including Bills Payable}}{\text{Net credit purchases}} \times (12 \text{ or } 365)$.

Working Capital Turnover Ratio

A turnover ratio calculated as $\frac{\text{Net sales}}{\text{Working capital}}$, where $\text{Working capital} = \text{Current Assets} - \text{Current Liabilities}$.

Fixed Asset Turnover Ratio

A turnover ratio calculated as $\frac{\text{Net sales}}{\text{Net Fixed Assets}}$, where Net Fixed Assets excludes investments and accounts for depreciation.

Interest Coverage Ratio

A coverage ratio measuring debt service capacity, calculated as $\frac{\text{Profit before interest and Tax}}{\text{Interest}}$.

Dividend Coverage Ratio

A coverage ratio calculated as $\frac{\text{Earnings after Tax (EAT)}}{\text{Preference Dividend}}$.

Total Coverage Ratio

A coverage ratio calculated as $\frac{\text{EBIT}}{\text{Total fixed charges}}$.

Solvency Ratio

A general solvency measurement calculated as $\frac{\text{Total Asset}}{\text{Total debt}}$.

Debt Equity Ratio

A structural leverage ratio calculated as $\frac{\text{Long term debt}}{\text{Equity shareholder's fund}}$, where long term debt includes debentures, mortgages, and long term loans.

Earnings Per Share (EPS)

A market test ratio calculated as $\frac{\text{Net profit available to equity shareholders}}{\text{Number of equity shares}}$, where the numerator equals $\text{Net profit} - (\text{Tax} + \text{Preference dividend})$.

Dividend Per Share (DPS)

A market test ratio calculated as $\frac{\text{Dividend Paid to equity shareholders}}{\text{Number of equity shares}}$.

Dividend Payout Ratio (D/P)

A ratio measuring earnings distributed as dividends, calculated as $\frac{\text{Dividend Paid to equity shareholders}}{\text{Net profit belonging to equity shareholders}}$ or $\frac{\text{DPS}}{\text{EPS}}$.

Price Earning Ratio (P/E)

A market valuation ratio calculated as $\frac{\text{Market price per share}}{\text{Earnings per share}}$, where $\text{Market price per share} = \text{PER} \times \text{EPS}$.

Debtors Velocity Formula

A derived balance calculation where $\text{Debtors} = \frac{\text{Credit sales} \times \text{Debtors velocity}}{360}$.

Creditors Velocity Formula

A derived balance calculation where $\text{Creditors} = \frac{\text{Credit purchases} \times \text{Creditors velocity}}{360}$.